IMF reaches staff-level agreement on latest EFF review

Event

On May 3rd the IMF announced that it had reached a staff-level agreement with the government of Sri Lanka in the second review of the country's existing extended fund facility (EFF).

Analysis

It seems likely that the conclusion of the staff-level discussions will clear the way for the IMF's executive board to disburse a third tranche of financial assistance under the EFF in the coming months. The board will review Sri Lanka's application, most likely in June, before making a decision that could in principle release a loan worth SDR119.9m (around US$164m) to the government. In two previous instalments the government has received SDR239.8m. The total size of the three-year EFF, which was approved in June 2016, stands at SDR1.1bn (about US$1.5bn).

Approval for the release of the third tranche of funding under the EFF is likely to be dependent on the new Inland Revenue Act being submitted to parliament by the time the executive board considers the second review. The IMF argues that the act "should pave the way for a durable fiscal consolidation", by boosting revenue collection. In noting the conclusion of staff-level discussions on the second review, the Fund commended the government for its recent moves to increase the accumulation of foreign-exchange reserves. This came after the target for foreign reserves at the end of 2016 had been missed. The IMF also noted that economic reforms, especially those designed to improve Sri Lanka's fiscal position, continued to make headway.

The Economist Intelligence Unit views the EFF as particularly important for the government's economic reform agenda. The large size of the cabinet and the opposing interests of the Sri Lanka Freedom Party and United Nationalist Party (which form the core of the ruling coalition) mean that it will be hard for the administration to advance potentially controversial reforms without the spur of pressure from the IMF.

Impact on the forecast

Our core forecast already anticipates that the IMF will release a further tranche of funding after the second review, and so no revisions are required.